For many years the institutional holdings of securities have been increasing. Institutions now hold in excess of forty percent of the market value of American equity securities. Investment managers of large portfolios generally believe that it is prudent either to invest assets in core or index portfolios which remain relatively stable or, if actively investing, to do so in a small enough number of securities that they can properly monitor the progress of the companies whose securities they own. If they pursue the second alternative, they may, in many instances, take positions exceeding five percent or more of a corporation's capitalization. Since there are few corporations that have a total turnover of their capitalization greater than two hundred and fifty percent on an annual basis, or an average of one percent per trading day, investment managers find themselves holding positions representing five or more days of trading volume. These are large and unwieldy positions relative to the capital available to those responsible for making markets in these securities. Hence, any order to trade such large positions may either remain unexecuted due to the absence of buyers or sellers large enough to be the contra party or, if execution is forced, may cause large, temporary swings in market prices through the effect of supply and demand forces. Large swings in prices reflect unrealistic market values to the general public and may cause inappropriate or even harmful reactions thereto. Strains are placed on the liquidity and depth of securities markets and instability may result. The absence of just this type of liquidity and depth was identified in the Report of the Presidential Task Force on Market Mechanisms (January 1988), also known as the "Brady Report", as a fundamental cause of the financial market freefall which occurred on Oct. 19, 1987. No automated trader system has specifically addressed these problems in institutionally dominated markets, and some automated systems, such as portfolio insurance, may even have contributed to the problems. A distinction is drawn here between automated traders which are decision makers and automated trading systems which are message switching systems that allow traders to execute orders.
Other potential difficulties also accompany major securities position changes by institutional holders. For example, it is in the interests of the large institution to maintain both anonymity and to not disclose information concerning the total size and price limit on an order when engaging in substantial transactions both to retain privacy and to avoid other traders front-running the order, thus adversely affecting prices received or paid. Identification of trader interest can result simply by allowing an order to remain open and unexecuted for periods of time as may occur during periods when individual specialists and traders try to assemble bids or offers for large orders or even with preexisting automated trading systems where orders remain in the system until actively cancelled.
Another problem is the inability to quickly enter, cancel or alter the desired terms of securities orders in a real-time environment whether using a computer-directed trading system or not. This difficulty has further exacerbated liquidity problems in the securities markets and has, consequently, made many users reluctant to use automated trading systems. It has also meant that large institutional investors have not had the opportunity to increase the return on their investments through short term trading. Most of their portfolio remains static and/or idle over substantial periods of time, especially when compared to the equivalent value of securities held by individuals of which a portion is continually coming to the marketplace due to the fact that there are many individual decision makers. Institutions, because of their size, reflect an aggregation of the holdings of many individuals subject to the authority of relatively few decision makers. The flow of any particular security to the marketplace from the "institutional market/sector" tends to gyrate widely when compared with the flow of that same security from the "individual market/sector", especially since institutions often react to similar kinds of stimulae, such as research, newsletters and other information services, in making market decisions and, consequently, place disproportionately sized orders at any given time.
The existence of problems such as those discussed above has hindered the development of effective automated trading systems and has caused trading volume by users of such systems to remain relatively low. As a result, such systems often remain under-utilized and, in some cases, have had to cease operations altogether. Although a number of patents, such as U.S. Pat. Nos. 3,573,747 to Adams et al., 4,334,270 to Towers, 4,412,287 to Braddock III, 4,554,418 to Toy, 4,556,066 to Towers, 4,674,044 to Kalmus et al., and 4,751,640 to Lucas et al., disclose automated systems useful in trading and valuing securities portfolios, none of these patents recognize or solve all of the problems outlined above. What is needed is an automatic system for trading securities held by institutions which constantly and anonymously provides depth and liquidity to the market by presenting a flow of buy and sell orders in a wide variety of securities in a real time environment without significant changes in the pattern of returns generated by the securities utilized in the original portfolio in a manner that seeks to provide an incremental profit in return.